Saving 10% of Your Income Really Isn't Enough for Retirement

This is a common piece of financial advice -- but it's probably wrong.

Christy Bieber
Christy Bieber
Mar 10, 2019 at 7:49AM
Investment Planning

Figuring out how much to save for retirement can be really complicated. To make the process easier, many people rely on conventional financial advice. And one of the most common pieces of advice you'll find is that you should save around 10% of your income for your senior years.

But what happens if you follow this advice and set aside 10% every year? Will it actually provide sufficient funds for you to live comfortably on as a senior? The math, unfortunately, says no, as you'll see below. 

Binder labeled retirement savings plan with glasses and calculator on top of it.

Image source: Getty Images.

Why saving 10% of your income isn't enough for retirement

The amount of money you'd end up with if you save 10% of your income for retirement varies based on your income and the age when you start saving.

The chart below shows how large your nest egg would be if you consistently saved 10% of annual income starting at the age of 30-- assuming you get a 2% annual raise, earn a 7% annual return on investment and retire at the age of 65. 

The chart also shows how much income this nest egg would produce, assuming that you follow the 4% rule and withdraw 4% of your savings in the first year of retirement and increase withdrawals to keep up with inflation each year. And it shows the income you'd need during your golden years, assuming that you want to replace 90% of your final salary earned in the year before you leave the workforce. 

Starting Income at Age 30 Savings at 65 Retirement Income Following the 4% Rule Income Needed in Retirement
$30,000 $481,046 $19,241.84 $52,938
$40,000 $641,395 $25,655.80 $70,584
$50,000 $801,744 $32,069.76 $88,230
$60,000 $962,093 $38,483.72 $105,877
$70,000 $1,122,441 $44,897.64 $123,523
$80,000 $1,282,790 $51,311.60 $141,169

As you can see, you'll face income shortfalls ranging from $33,697 to almost $90,000. While you'll also have income coming in from Social Security, Social Security benefits alone won't be enough to make up the shortfall.

A 30-year-old today making $30,000 would have projected Social Security benefits of around $13,896 at age 65, which would leave that 30-year-old with just over $33,000 in total annual income -- far less than the $52,938 needed. As for the 30-year-old making $80,000 today, projected Social Security benefits at 65 would be $25,848. With a total annual income of $77,159, he'd be over $64,000 short! 

Saving more than 10% of income is essential

The above assumptions were actually pretty generous in terms of how much money you'd end up with in retirement, because many experts now believe withdrawing 4% of your savings is too much. Life expectancies have gotten longer, and projected future returns are lower, so you may need to withdraw less from your savings to ensure you don't run out of money before the end of your retirement years. 

Instead of assuming 10% of your income is enough, your best bet is to figure out how much you actually need to save for retirement and determine the amount to set aside annually to hit that goal. There are a few ways to do that, including estimating you'll need 10 times your final salary, or projecting what your budget will actually be in retirement to figure out how much income you'll require. 

Or, if you don't feel like doing the math, the chart in this article shows you'll be pretty safe if you save at least 15% of your income -- but you're better off striving to set aside 20% of what you earn each year. 

Start saving as much as you can today

Many Americans aren't even hitting the 10% savings goal, so the idea of saving more than 10% can be daunting. But the important thing is to start saving ASAP and work up to reaching your 15% or 20% milestone as soon as you can.

You can slowly increase the amount you save over time, and increase the percentage of income you save each time you get a raise. You should also take advantage of an employer match in your 401(k) if you can, as this reduces the percentage of income you personally need to save.

Through careful financial planning and gradual increases in your retirement contributions, hopefully you'll be able to eventually put aside the funds you need to have financial security as a senior.